Discounting Our Way to Affordability?

Higher education can’t solve the problem of student access merely by having a few wealthy colleges replace grants with loans, write William Durden and Robert Massa.


February 5, 2008

American higher education is running on a financial model that is broken. There is little correlation between cost and tuition charged, and both are escalating rapidly.

What this country needs goes well beyond a few very wealthy institutions (see Harvard and Yale) increasing their discounts -- subsidizing their own high costs by eliminating their students’ loans and replacing them with grants. This is just tweaking around the edges and disguises the fact that their tuition and operational costs continue to rise. The roots of the problem for the nation and its many students are left unattended.

We must, as a nation, call for a major rethinking of higher education finance. All colleges and universities should drive this national discussion rather than allow the wealthiest few to continue using a Band-Aid approach -- through increased subsidies from huge endowment earnings -- as the answer to a bigger problem.

Rising costs and tuition in American colleges cannot be addressed without also examining the rising demands being placed on our institutions. American universities are expected to do many things besides deliver classroom instruction, including offering residential life in buildings with the latest technology, producing new knowledge through research and supporting athletics on a major scale. All these correctly belong in American higher education, and all are subject to increasing demands from the public and from the academy itself.

Some might call for cost reductions through cutting expenses, a reasonable approach if cost equated to price in American higher education. It does not, however, and many colleges already operate efficiently compared with other social organizations. Many are already cutting expenses in operations through energy savings and consortium-related shared services efficiencies. Usually, any savings are quickly consumed by other worthwhile demands such as more financial aid, building maintenance, new programs, research support, technology and benefits.

At most universities, the price charged to students is lower than the institutions’ costs in providing that education. At public institutions the difference is mainly covered by state subsidies; at private colleges gifts and endowments make up much of the difference. As an example, Dickinson’s tuition covers 77 percent of educational and general expenditures. If costs are marginally decreased, they typically are still in excess of the price charged. As a result, price does not automatically decrease in relation to cost savings.

To begin to equate cost and price would require a complete rethinking of what is necessary for an excellent undergraduate education in the U.S. Our model demands competition and the constant addition of new programs. Cost and tuition continue to escalate because of what is demanded by the public and higher education itself. Unlike a traditional business model, where competition lowers prices through factors such as economies of scale, in higher education, competition actually increases cost because new programs and buildings, fueled by a desire to provide “the best,” are expensive.

If we want to establish a correlation between cost savings and decreased tuition, and if we want to advance affordability, we must radically shift some longstanding expectations. Are universities willing, for example, to reduce their emphasis on faculty research, athletics, student-life services, the quality of physical campuses, smaller classes, study-abroad options and technology? Are there other strategies, such as programmatic cooperation among several institutions, to reduce costs? Or, will higher education reaffirm the point that there is a cost to providing a high quality, distinctively American college education?

It was discouraging these past few weeks to see several extremely wealthy institutions behave as though replacing student loans with grants will address college affordability. The vast majority of colleges, lacking massive endowments, would have to increase tuition for most students in order to put money back into the institution to fund tuition discounts for a segment of their student body. If tuition rises, access becomes an issue for lower income students. Somewhere, somehow, someone has to pay for someone else to get a free or heavily discounted education.

Equally distressing is the notion, put forward by some members of Congress and other commentators, that forcing institutions to spend certain percentages of their endowments will bring about affordability. Granted, replacing loans with grants lowers the ultimate price -- years after graduation -- that individuals will pay. But it does nothing to address affordability now, since loan or grant, the money buys the same education today. While we applaud Congressional attempts at addressing the price issue, trying to create affordability by dictating endowment spending rates can result in increased institutional spending to cover additional discretionary costs, doing nothing to contain costs.

Although this is, in our view, a major issue in higher education finance, the public needs to understand the context. According to the latest data from the U.S. Government Accountability Office, nearly half of all undergraduate students attend institutions where the average annual in-state tuition and fees is less than $2,550, and three out of five students attend institutions where the average annual in-state tuition and fees is less than $4,750. And while those of us at highly selective, well endowed, private colleges think our world is higher education, only three out of every 100 students attend institutions where the average annual tuition and fees exceed $25,000.

Nevertheless, if we are to truly address affordability in a most visible sector, we must address it in all of higher education -- public and private institutions -- and not allow a select few to set an agenda that excludes the majority. If we are to get to the root of the issues of cost, we must be able to talk to one another to do so.

Right now, that discussion cannot be attempted. The antitrust laws enforced in the early 1990s, in response to financial aid meetings among colleges that had an “overlap” in the students they recruit, had the unfortunate consequence of severely limiting discussion among colleges and universities about cost, at great detriment to the public. We call for Congress to revisit and exempt higher education, as it has with major league sports, to permit such conversation for the benefit of the public -- not to reintroduce the old practice of comparing individual student financial aid awards. We can't tackle the problem together if we can’t talk.

Some leaders of major institutions are speaking out. In his January 23 USA Today opinion piece, the chancellor of the University of California at Berkeley called for a rethinking of the business model for financing public higher education in the United States, and proposed a public-private partnership to create endowments that would ensure access for all students, regardless of family income, to attend public universities.

Would it not be beneficial to the nation if other colleges and universities, public and private, could join Berkeley’s chancellor in detailed, candid discussion to confront cost issues and replace a broken business model? This challenge lies before the country and we must take all those steps legally, philosophically and pragmatically to make it happen.

Higher education cannot discount its way to affordability. If we try to do so, we are likely to go the route of the airline industry … discounts … deep discounts … deeper discounts … then belly up.


William G. Durden is president and Robert J. Massa is vice president for enrollment and college relations at Dickinson College.


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